Apple & YMTC – Insurance backfire

Apple likely to drop its insurance policy.

• Apple is demonstrating just how difficult it is to keep both the Chinese Communist Party and the US Congress happy at the same time and now it is likely to be forced to drop its budding relationship with the Chinese memory maker YMTC.
• Apple has been warned by the more hawkish end of the Republican party that it will face intense scrutiny if it proceeds with its relationship with YMTC in a threat that while nonsensical at face value, has teeth.
• Yangtse Memory Technology Corp. (YMTC) is a subsidiary of Tsinghua Unigroup which is a state-backed semiconductor company and from both companies, the US State Department has uncovered links to the Chinese military (see here).
• YMTC specialises in solid-state storage (NAND) which is very similar in function to a disk drive, but the data is stored on silicon chips rather than magnetic disks.
• This technology has been around for a considerable amount of time, is widely available from non-US suppliers and does not use cutting-edge semiconductor manufacturing technologies.
• YMTC manufactures its NAND chips on 20nm equipment which is several generations away from the current leading edge which is at 5nm.
• NAND is a commodity where Samsung, Kioxia (Toshiba), SK Hynix and Western Digital are the global leaders.
• As a result of being a commodity, a device maker can go to any one of these companies and buy almost exactly the same product, making switching from one supplier to another pretty simple.
• The idea that using chips from YMTC somehow compromises national security is absurd and is masking the real agenda which is to limit the rise of China’s technology sector by any means necessary.
• This is especially the case as I have long been of the opinion that YMTC chips would only be used in Apple products destined for the Chinese market and would never find their way into Apple products sold outside of China (see here).
• Consequently, how Chinese memory chips in Chinese iPhones being used in China compromise US national security is a mystery.
• I have long thought that Apple is seeking a relationship with YMTC as an insurance policy.
• Apple does have a very large and thriving business for its products in China and, given the increasing tension between the USA and China, this creates a pressure point that the Chinese state could use against the USA.
• If Apple was to use some Chinese-made components in the devices that it sells in China, any action taken against Apple by the Chinese state would in turn hurt one of the very companies that it is trying to develop.
• This could make the Chinese state think twice about making life difficult for Apple along with the fact that Apple’s products are very popular in China and a ban or restriction would not be well received.
• However, if it comes to a choice between its own government and the CCP, it is pretty clear which one Apple will choose.
• Having Apple as a customer would be a huge boost for YMTC and would doubtless enable it to win other customers which is why the USA wants to prevent it from becoming a supplier to Apple.
• The Republican threat has teeth as there is a good possibility that the Republicans win back either the Senate or the House or even both in November and this issue also has reasonably good bipartisan support.
• Furthermore, Apple is currently under investigation for its business practices related to the App Store which would obviously become much more intense if it proceeds with this relationship.
• Hence, I suspect that if the clamouring becomes louder and comes from a wider section of the political spectrum, then Apple will drop YMTC as a supplier meaning that YMTC will disappear once again into industry obscurity.
• While China is unlikely to win in semiconductors, it is already neck and neck with the USA in autonomous driving, certain areas of AI and robotics and it is here where I expect that the real technology war will be fought.
• This is why the USA is working to leverage its superiority in semiconductors to hobble these other areas where China is doing well.
• This is what the effective ban on Nvidia and AMD selling AI chips to China is all about (see here) and there is likely to be more in the future.